Open markets will relieve political tensions
Comment of the Day

September 28 2010

Commentary by David Fuller

Open markets will relieve political tensions

This is a good column (may require subscription registration, PDF also provided) by Komal Sri-Kumar for the Financial Times. Here is a brief sample
By understanding better how to bring about equilibrium in international trade, US and European negotiators can go a long way toward improving their competitive position, as well as reduce the political heat on both sides. In pioneering work on exchange rates done during the 1960s, my Columbia University doctoral dissertation adviser, Robert Mundell, showed that if exchange rates are fixed, adjustment by the trading economies occurs in terms of changes in domestic costs and prices. The inflationary pressures evident in China validate Professor Mundell's theories. There is, therefore, nothing "manipulative" about simply maintaining fixed exchange rates. Keep in mind that under the Bretton Woods system of exchange rates from the end of the second world war until the early 1970s, keeping the rates fixed with respect to the dollar was a sign of good economic housekeeping!

What needs to be improved is foreign exporters' access to Chinese markets. This was clearly lacking during 2006-08 and was a main reason why the US did not achieve a significant reduction in its trade deficit despite a 20 per cent appreciation of the renminbi. One instance of market opening is the decision by the Chinese government in July to expand its government procurement efforts. Companies from both EU countries and the US will likely benefit from the move. Another development is a gradual opening that is taking place in the Chinese insurance market - the sixth largest in the world measured by premiums - to foreign competition. But a lot more has yet to happen. For example, the world's largest wind energy operators have not won a national development project in China. If the US and the EU would shift their focus from the exchange rate to prying open the lush Chinese domestic market, they would benefit more in terms of increased exports, economic growth and jobs.

David Fuller's view Good point and good luck. The goal is laudable but I suspect that China will resist, preferring joint ventures which are a means of gaining technology and expertise, so that they can then compete internationally in the same industries.

I have always regarded the currency issue as populist and disingenuous.

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